The Power to Tax

Dr. Peterson isAssociate Professor of Eco­nomics, GraduateSchool of Business Admini­stration, New YorkUniversity, and a weekly contributor to the Wall Street Journal.

Good, now it’s finished, the or­deal’s over, April fifteenth has come and gone, and another 1040 is completed, double-checked, signed, and, with a sigh of relief, mailed to the Internal Revenue Service Regional Office.

You’re happy it’s behind you, you think; but on second thought, maybe satisfied or, still better, re­lieved is the better word. For you remember the cycle is by no means completed, that another phase be­gins, that for some taxpayers there will be challenges of their returns—"audits," as they are called. That’s right, come to think of it, your neighbor down the street was audited, and only last week a fellow at the office was called in. Your brow furrows a bit, for you realize that your return—albeit an honest return, you’d swear on a Bible to that—has to undergo the closest scrutiny: hu­man and electronic eyes will probe every line and figure.

First, some clerk or clerks will give it a rudimentary check: Are the schedules enclosed? Are the W-2′s attached? Did his wife sign? Is the arithmetic right? That kind of thing.

Then, the more incisive check by an IRS agent or agents: Did he elect the Standard Deduction, or did he itemize? Are his con­tributions in line? Is his dividend credit and exclusion in good or­der? What about his "T & E" (business travel and entertain­ment expense)? Hmm, here’s an item—took his wife to a business convention, but she served as of­ficial hostess. Well, that may be all right….

Now, the most probing check of all—the Machine. To the big IBM 7090 you are but a number: no Mr., Mrs., or Miss—a number—136-14-6928. Your return will be scrutinized and memorized elec­tronically. Permanently. The Ma­chine will in effect "process" a part of your life forever; your re­turn sets down, after all, a pre­cious and intimate year of your ex­istence: Here you list by name your wife, your children and their ages, and other dependents. And you list your family sicknesses—how much you paid Dr. Smith for Johnny’s broken arm, how much to the Good Samaritan Hospital for Mary’s appendectomy, how much to Dr. Jones, the orthodontist, for Betty Lou’s braces. (If there were psychiatric expenses, you’d list those, too.) And your debts—the interest paid on the home mort­gage, the interest on the auto loan, the interest on the note at the bank and on your margin account at the stockbroker. And on T & E—your business trip to Phoenix, the lunch with the purchasing agent of XYZ Co., the annual com­pany convention in Chicago, and much more. And your contribu­tions—how much you gave to the American Red Cross, the Boy Scouts, the Salvation Army, the MemorialChurch, YaleUniver­sity, and so on. All this is fed into the Machine, into its memory unit, permanently, along with all your sources of income, the stocks you own, your bonds, your bank ac­counts, everything….

Without a Search Warrant

So you reflect, and you’re dis­concerted. The Bill of Rights guar­antees the privacy of your papers and effects against a possibly in­quisitorial government. Says the Fourth Amendment: "The right of the people to be secure in their persons, houses, papers, and ef­fects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the per­sons or things to be seized." And now you divulge all, and must be prepared to defend all with can­celed checks and other documenta­tion, and without any search war­rant. And another thing: in audits the burden of proof is on the tax­payer—in effect, he is assumed to be guilty and must prove himself innocent, thereby reversing a cen­turies-old principle of Anglo-American jurisprudence. It is dis­comforting, very.

Especially the size of the tax bite, the swiftly ascending "grad­uated" rates. You’re not so old that you can’t still remember when the income tax was relatively mild. That was before World War II.

The tax didn’t hurt so much then. There was no withholding tax. No estimated income forms. No quar­terly payments.

Years ago—when was it?—in the late 40′s, after the War—you were just plain mad about the whole business, recalling that in their Manifesto Marx and Engels had baldly called for "a heavy progressive or graduated income tax" as a means of "making des­potic inroads on the rights of property, and on the conditions of bourgeois production." And you recall how some sage and pro­phetic members of the Congress in 1913 predicted that the 7 per cent top rate could reach the "con­fiscatory" level of 15 per cent, and how one congressman predicted the income tax would "make liars of us all."

But now you’re older, mellower, a respected and responsible mem­ber of the community; and, be­sides, the doctor has warned you about excitement and high blood pressure. Sure, the progressive in­come tax was a booby trap, but that doesn’t mean we have to fall into it, that we can’t tame it, re­fine away its bad points, keep it from getting out of hand. After all, we’re grown up, this is a de­mocracy, this is 1963, we’re rea­sonable men, and tax reform and tax cuts are very much in the wind.

Resist the Beginnings

Still—and your brow furrows again—the income tax has indeed gotten out of hand. We’ve fallen into our own booby trap, from the top rate of 7 per cent in 1913 we voted in a top rate of 24 per cent in 1929. With the social turbu­lence of the 1930′s came a top rate of 79 per cent. We hurdled the 90 per cent mark in World War II and somehow we’ve stayed at this confiscatory mark and at a broad range of "progressive," i.e., out­landish, rates ever since, in war and peace, in prosperity and reces­sion, under all administrations, whether Republican or Democrat­ic. Is there no end?

You are reminded of a wise Scottish economist, John Ramsay McCulloch, who wrote in 1845 a remarkable bit of economic logic:

The moment you abandon… the cardinal principle of exacting from all individuals the same proportion of their income or their property, you are at sea without rudder or compass, and there is no amount of injustice or folly you may not commit…. In such matters the maxim of obsta principiis [resist the beginnings] should be firmly adhered to by every prudent and honest statesman. Graduation is not an evil to be paltered with. Adopt it and you will effectually paralyze industry and check accumulation, at the same time that every man who has any property will hasten, by car­rying it out of the country, to protect it from confiscation. The savages de­scribed by Montesquieu, who to get at the fruit cut down the tree, are about as good financiers as the ad­vocates of this sort of taxes.

Certainly the history of the in­come tax in America has borne out the fears of McCulloch. How the tax structure has grown! Like Topsy, in this way and that! With shelves and shelves of laws, regulations, tax court decisions, and IRS rulings by the thousands and maybe by the tens of thou­sands—so many in fact that no one man knows them all, bringing in­to being a whole new profession of tax accountants and tax attor­neys. The litigation is endless, costly, and many tax evaders wind up in jail.

Contrast this makeshift, com­plex, and virtually incomprehen­sible result with the simplicity of proportionality—seen, for ex­ample, in the Judaeo-Christian practice of tithing, with the tithe at 10 per cent, varying propor­tionately with a man’s income and with good times and bad. And so you find yourself agreeing with the President that the present tax system is the "largest single bar­rier to the full employment of our manpower and resources and to a higher rate of economic growth." You recall that in his TV address last August he said that our tax rates "are so high as to weaken the very essence of the progress of a free society—the incentive of additional returns for addition­al effort."

Maybe the late economist, Sum­ner Slichter of Harvard Uni­versity, put it more pungently when he said: "The tax history of the United States in recent years has been fairly sensational. A visitor from Mars would suspect that a communist fifth columnist was writing the laws for the pur­pose of making private enterprise unworkable."

So you muse, one taxpayer among millions. Like virtually all your fellow Americans, you want to pay your share for the cost of government, for good government; but while taxes may be as certain as death, and almost as unpleas­ant, you quietly question the use of taxes as a social tool for the re­distribution of wealth. You re­member Chief Justice John Mar­shall’s famous dictum that the power to tax involves the power to destroy….

THE FREEMAN

EMAIL UPDATES

* indicates required

Email Address *

CURRENT ISSUE

December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.